ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion
and analysis of our financial condition and results of operations for the years ended December 31, 2023 and 2022 should be read in conjunction
with our consolidated financial statements and related notes to those consolidated financial statements that are included elsewhere in
this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve
risks and uncertainties.
Special Note Regarding
Forward-looking Statements
All statements other
than statements of historical fact included in this Annual Report Form 10-K including, without limitation, statements under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and
the plans and objectives of management for future operations, are forward-looking statements. When used in this Annual Report on Form
10-K, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend”
and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual
results could differ materially from those contemplated by the forward-looking statements as a result of a number of factors, including
those set forth under the risk factors and business sections in this Annual Report on Form 10-K.
Overview
We are a commercial stage
company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. We
are focused on establishing a leading role in the innovation of diagnostic testing, utilizing proprietary technology to deliver precise,
genetics-driven results. As a first step into the laboratory market, we completed an acquisition of a 40% membership interest in Laboratory
Services MSO, LLC (“Lab Services MSO”), which closed in February 2023.
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We have the following
areas of focus:
Laboratory Acquisitions
We have embarked on a
laboratory rollup strategy focused on forming joint ventures and acquiring laboratories that are accretive to our commercial strategy.
As a first step, in February of 2023, we acquired a 40% membership interest in Lab Services MSO.
Research and Development
We are focused on bringing
forward intellectual property through joint patent filings with the Massachusetts Institute of Technology (MIT). We completed a sponsored
research and co-development project with MIT led by Professor Shuguang Zhang as Principal Investigator. Using the unique QTY code protein
design platform, six water-soluble variant cytokine receptors have been successfully designed and tested to show binding affinity to the
respective cytokines. We currently are focused on bringing forward the intellectual property associated with this program through joint
patent submissions.
Product
Commercialization
We have begun the commercialization
and development of a versatile breathalyzer system.
We were granted
exclusive distributorship rights for the KetoAir from Qi Diagnostics for the following territories: North America, South America,
the EU and the UK. We had a pilot launch and exhibition of the KetoAir in this year’s KetoCon conference in Austin, Texas
(April 21-23, 2023). For our commercialization strategy, we intend to target the diabetes and obesity markets. We are evaluating
options for commercialization, including identifying distribution partners or distributing the KetoAir ourselves.
The KetoAir is a handheld
device that allows the user to detect acetone levels in exhaled breath. The acetone level is in concentration units (ppm, part-per-million)
such that the user will know his/her real-time ketosis status: inadequate ketosis (0-3.99 ppm), mild ketosis (4-9.99 ppm), optimal ketosis
(10-40 ppm), or alarming level (> 40 ppm). The KetoAir is registered with the United States FDA as a Class I medical device. The device
is also paired with an “AI Nutritionist” software program (via Bluetooth connection) which is downloadable from Google Play
(for Android mobile phones, approved) and iPhone (the app is currently being reviewed by Apple iOS AppStore). It helps users monitor and
manage their ketogenic diet and related programs. We believe the KetoAir can be an essential tool to help diabetic patients adhere to
their therapeutic programs and optimize their ketogenic dietary management.
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Other Areas
In order to preserve
cash and focus on our core laboratory rollup strategy and product commercialization, we have currently suspended all research and development
efforts related to cellular therapy in order to redirect our funding efforts to our core business strategies outlined above.
Going Concern
We are a commercial stage company dedicated to
developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. We are focused on establishing
a leading role in the innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results.
We also provide laboratory services, offering a broad portfolio of diagnostic tests, including drug testing, toxicology, and a broad array
of test services, from general bloodwork to anatomic pathology, and urine toxicology.
In
addition, we own commercial real estate that houses our headquarters in Freehold, New Jersey. We also have income from equity method investment
through our forty percent (40%) interest in Lab Services MSO. These consolidated financial statements have been prepared assuming that
we will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities
in the normal course of business.
As reflected in the accompanying
consolidated financial statements, we had working capital deficit of approximately $5,912,000 at December 31, 2023 and had incurred recurring
net losses and generated negative cash flow from operating activities of approximately $16,707,000 and $6,505,000 for the year ended December
31, 2023, respectively.
We have a limited operating
history and our continued growth is dependent upon the continuation of generating rental revenue from its income-producing real estate
property in New Jersey and income from equity method investment through its forty percent (40%) interest in Lab Services MSO and
obtaining additional financing to fund future obligations and pay liabilities arising from ordinary course business operations. In addition,
the current cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this
report. These matters raise substantial doubt about our ability to continue as a going concern. The ability of us to continue as a going
concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There
are no assurances that we will be successful in its efforts to generate sufficient revenues, maintain sufficient cash balance or report
profitable operations or to continue as a going concern. We plan on raising capital through the sale of equity to implement its business
plan. However, there is no assurance these plans will be realized and that any additional financings will be available to us on satisfactory
terms and conditions, if any.
The accompanying consolidated
financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts
and classification of liabilities that may result should we be unable to continue as a going concern.
Critical
Accounting Policies
Use
of Estimates
The preparation of the
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Changes in these estimates and assumptions may have a material impact on the consolidated financial statements and
accompanying notes. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the
estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management
considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual
results could differ significantly from those estimates.
Significant estimates during the years ended December 31, 2023 and 2022
include the useful life of property and equipment, investment in real estate, and intangible assets, the assumptions used in assessing
impairment of long-term assets, the valuation of deferred tax assets and the associated valuation allowances, the valuation of stock-based
compensation, the assumptions used to determine fair value of warrants and embedded conversion features of convertible note payable, and
the fair value of the consideration given and assets acquired in the purchase of our equity interest in Lab Services MSO.
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Investment in Unconsolidated
Companies
We use the equity method
of accounting for its investments in, and earning or loss of, companies that it does not control but over which it does exert significant
influence. We consider whether the fair values of our equity method investments have declined below their carrying values whenever adverse
events or changes in circumstances indicate that recorded values may not be recoverable. If we consider any decline to be other than temporary
(based on various factors, including historical financial results and the overall health of the investee), then a write-down would be
recorded to estimated fair value. Impairment of equity method investment amounted to $9,651,361 for the year ended December 31, 2023.
See Note 7 for discussion of equity method investments.
Real Property Rental
We have determined that
ASC 606 does not apply to rental contracts, which are within the scope of other revenue recognition accounting standards.
Rental income from operating
leases is recognized on a straight-line basis under the guidance of ASC 842. Lease payments under tenant leases are recognized on a straight-line
basis over the term of the related leases. The cumulative difference between lease revenue recognized under the straight-line method and
contractual lease payments are included in rent receivable on the consolidated balance sheets.
We do not offer promotional
payments, customer coupons, rebates or other cash redemption offers to its customers.
Income Taxes
We
are governed by the income tax laws of China and the United States. Income taxes are accounted for pursuant to ASC 740 “Accounting
for Income Taxes,” which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for
taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated using tax
rates that have been enacted or substantively enacted by the balance sheet date.
Deferred
tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the
carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable
tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized
to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated
using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged
or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred
tax is changed to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation
authority and we intend to settle its current tax assets and liabilities on a net basis.
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RESULTS OF OPERATIONS
Comparison of Results of Operations for the
Years Ended December 31, 2023 and 2022
Real
Property Rental Revenue
For
the year ended December 31, 2023, we had real property rental revenue of $1,255,681, as compared to $1,202,169 for the year ended December
31, 2022, an increase of $53,512, or 4.5%. The increase was primarily attributable to the increase in the number of tenants occupying
the building in the year ended December 31, 2023 as compared to the year ended December 31, 2022. We expect that our revenue from real
property rent will remain at its current level with minimal increase in the near future.
Real Property Operating
Expenses
Real property operating
expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities
and other expenses related to our rental properties.
For the year ended December
31, 2023, our real property operating expenses amounted to $1,017,493, as compared to $929,441 for
the year ended December 31, 2022, an increase of $88,052 or 9.5%. The increase was primarily due to an increase in property management
fees of approximately $15,000, an increase in repairs and maintenance fee of approximately $64,000, and an increase in other miscellaneous
items of approximately $9,000.
Real Property Operating
Income
Our real property operating
income for the year ended December 31, 2023 was $238,188, representing a decrease of $34,540 or 12.7%, as compared to $272,728
for the year ended December 31, 2022. The decrease was primarily attributable to the increase in real property operating expenses
as described above. We expect our real property operating income will remain at its current level with minimal increase in the near future.
Loss
from Equity Method Investment — Lab Services MSO
For the year ended December 31, 2023, we had loss from our investment in
Lab Services MSO of $8,571,647, which consists of our share of Lab Services MSO’s net income of $1,236,391 and amortization of identifiable
intangible assets acquired from Lab Services MSO acquisition of $611,356 and impairment of goodwill acquired from Lab Services MSO acquisition
of $9,196,682, which was primarily attributable to Lab Services MSO’s lower revenues and net incomes than anticipated and the decline
in our stock price and market capitalization. We purchased 40% of Lab Services MSO on February 9, 2023. In the third quarter of 2023,
Lab Services MSO acquired Merlin Technologies, Inc. which is a medical equipment retail company. Lab Services MSO has also opened a new
laboratory, Veritas Laboratories LLC (“Veritas”). Veritas is a CLIA-certified and COLA-accredited laboratory located in Scottsdale,
Arizona that offers a wide range of high-quality testing, including drug testing, genetic testing, urinary testing and COVID-19 PCR testing.
We expect to receive income from our investment in Lab Services MSO in the near future.
Other Operating Expenses
For
the years ended December 31, 2023 and 2022, other operating expenses consisted of the following:
Years Ended December 31,
Directors and officers’ liability insurance premium 349,745 414,757
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Loss
from Operations
As a result of the foregoing, for the year ended December 31, 2023, loss
from operations amounted to $15,753,683, as compared to $8,792,895 for the year ended December
31, 2022, an increase of $6,960,788 or 79.2%.
Other
(Expense) Income
Other (expense) income mainly includes third party and related party interest
expense, conversion inducement expense, loss from equity method investment - Epicon, change in fair value of derivative liability, impairment
of equity method investment - Epicon, gain on debts extinguishment, and other miscellaneous (expense) income.
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Other expense, net, totaled $953,327 for the year ended December 31, 2023,
as compared to $3,137,952 for the year ended December 31, 2022, a decrease of $2,184,625,
or 69.6%, which was primarily attributable to a decrease in third party interest expense of approximately $2,179,000, mainly driven by
the decrease in amortization of debt discount and debt issuance cost of approximately $2,767,000 which was offset by the increased interest
expense of approximately $588,000 from third party debts in the year ended December 31, 2023, a decrease in conversion inducement expense
of approximately $344,000 resulted from the reduction in the conversion price which was incurred in the year ended December 31, 2022,
and an increase in gain on debts extinguishment of approximately $683,000, offset by a decrease in gain from change in fair value of derivative
liability of approximately $412,000, and an increase in impairment of equity method investment - Epicon of approximately $455,000 due
to Epicon’s series of operating losses and the joint venture partner unable to obtain funds to commence operations, and a decrease
in other miscellaneous income of approximately $224,000.
Income Taxes
We did not
have any income taxes expense for the years ended December 31, 2023 and 2022 since we incurred losses in these periods.
Net Loss
As
a result of the factors described above, our net loss was $16,707,010 for the year ended December 31, 2023, as compared to $11,930,847
for the year ended December 31, 2022, an increase of $4,776,163 or 40.0%.
Net Loss Attributable
to Avalon GloboCare Corp. Common Shareholders
The
net loss attributable to our common shareholders was $16,707,010 or $1.59 per share (basic and diluted) for the year ended December 31,
2023, as compared to $11,930,847 or $1.28 per share (basic and diluted) for the year ended December 31, 2022, an increase of $4,776,163
or 40.0%.
Foreign Currency
Translation Adjustment
Our
reporting currency is the U.S. dollar. The functional currency of our parent company, AHS, Avalon RT 9, and Avalon Lab is the U.S. dollar
and the functional currency of Avalon Shanghai is the Chinese Renminbi (“RMB”). The financial statement of our subsidiary
whose functional currency is the RMB are translated to U.S. dollars using period end rate of exchange for assets and liabilities, average
rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rate for equity. Net gains and losses resulting
from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are
a non-cash adjustment, we reported a foreign currency translation loss of $18,590 and $47,871 for the years ended December 31, 2023 and
2022, respectively. This non-cash loss had the effect of increasing our reported comprehensive loss.
Comprehensive Loss
As a result
of our foreign currency translation adjustment, we had comprehensive loss of $16,725,600 and $11,978,718 for the years ended December
31, 2023 and 2022, respectively.
Liquidity and Capital
Resources
We have
a limited operating history and our continued growth is dependent upon the continuation of generating rental revenue from our income-producing
real estate property in New Jersey and income from equity method investment through our equity interest in Lab Services MSO, as well as
obtaining additional financing to fund future obligations and pay liabilities arising from ordinary course business operations. In addition,
the current cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this
report. These matters raise substantial doubt about our ability to continue as a going concern. The ability of us to continue as a going
concern is dependent on our ability to raise additional capital, implement its business plan, and generate sufficient revenues. There
are no assurances that we will be successful in its efforts to generate sufficient revenues, maintain sufficient cash balance or report
profitable operations or to continue as a going concern. As described below, we have raised additional capital through the sale of equity
and debt and our plans on raising additional capital in the future through the sale of equity or debt to implement its business plan.
However, there is no assurance these plans will be realized and that any additional financings will be available to us on satisfactory
terms and conditions, if at all.
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Liquidity is the ability
of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing
basis. At December 31, 2023 and 2022, we had cash balance of approximately $285,000 and $1,991,000, respectively. These funds are kept
in financial institutions located as follows:
The following
table sets forth a summary of changes in our working capital deficit from December 31, 2022 to December 31, 2023:
December 31, Changes in
Working capital deficit:
Our
working capital deficit increased by $4,705,540 to $5,911,819 at December 31, 2023 from $1,206,279 at December 31, 2022. The increase
in working capital deficit was primarily attributable to a decrease in cash of approximately $1,706,000, an increase in accrued professional
fees of approximately $131,000, an increase in accrued payroll liability and compensation of approximately $365,000, an increase in accrued
liabilities and other payables – related parties of approximately $106,000, an increase in operating lease obligation of approximately
$118,000, an increase in advance from sale of noncontrolling interest – related party of approximately $486,000 driven by advance
received in connection with the membership interest purchase agreement signed in November 2023, an increase in equity method investment
payable of $667,000 resulting from the purchase of 40% of Lab Services MSO incurred in February 2023, an increase in convertible note
payable, net, of approximately $1,925,000 resulting from the issuance of May 2023 Convertible Note, July 2023 Convertible Note, and October
2023 Convertible Note, offset by an increase in prepaid expense and other current assets of approximately $120,000, and a decrease in
accrued research and development fees of approximately $629,000 mainly due to the extinguishment of accrued liability.
Because
the exchange rate conversion is different for the consolidated balance sheets and the consolidated statements of cash flows, the changes
in assets and liabilities reflected on the consolidated statements of cash flows are not necessarily identical with the comparable changes
reflected on the consolidated balance sheets.
Cash
Flows for the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
The
following summarizes the key components of our cash flows for the years ended December 31, 2023 and 2022:
Years Ended December 31,
Effect of exchange rate on cash (3,970 ) 10,077
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Net
cash flow used in operating activities for the year ended December 31, 2023 was $6,504,718, which primarily reflected our consolidated
net loss of approximately $16,707,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in operating
lease obligation of approximately $113,000, and the non-cash items adjustment, consisting of change in fair market value of derivative
liability of approximately $188,000, and gain on debts extinguishment of approximately $683,000, offset by depreciation of approximately
$212,000, amortization of operating lease right-of-use asset of approximately $118,000, stock-based compensation and service expense of
approximately $1,180,000, loss from equity method investments of approximately $8,590,000 mainly due to the impairment of goodwill acquired
from Lab Services MSO acquisition resulting from Lab Services MSO’s lower revenues and net incomes than anticipated and the decline
in our stock price and market capitalization, impairment of equity method investment - Epicon of approximately $455,000 due to Epicon’s
series of operating losses and the joint venture partner unable to obtain funds to commence operations, and amortization of debt issuance
costs and debt discount of approximately $544,000 resulting from our outstanding convertible note payable and note payable, and the changes
in operating assets and liabilities, primarily consisting of an increase in accrued liabilities and other payables – related parties
of approximately $106,000 driven by the increased accrued interest for related party.
Net
cash flow used in operating activities for the year ended December 31, 2022 was $7,037,224, which primarily reflected our consolidated
net loss of approximately $11,931,000, and the non-cash item adjustment consisting of change in fair market value of derivative
liability of approximately $601,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in operating
lease obligation of approximately $142,000, offset by an increase in accrued liabilities and other payables of approximately $331,000,
an increase in accrued liabilities and other payables – related parties of approximately $80,000, and the non-cash items adjustment
primarily consisting of depreciation of approximately $331,000, amortization of operating lease right-of-use asset of approximately $136,000,
stock-based compensation and service expense of approximately $1,107,000, amortization of debt issuance costs and debt discount of approximately
$3,311,000 mainly resulting from the conversion of convertible debt in July 2022, and conversion inducement expense of approximately
$344,000 resulted from the reduction in the conversion price.
We
expect our cash used in operating activities to increase due to the following:
● the development and commercialization of new products;
● an increase in professional staff and services; and
Net
cash flow used in investing activities was $22,159 for the year ended December 31, 2023 as compared to $9,053,470 for the year ended
December 31, 2022. During the year ended December 31, 2023, we made payment for purchase of property and equipment of approximately $22,000. During
the year ended December 31, 2022, we made payments for purchase of property and equipment of approximately $2,000 and made additional
investment in Epicon equity method investment of approximately $52,000 and made payments for acquisition of 40% interest in Laboratory
Services MSO, LLC of approximately $9,000,000.
Net cash flow provided by financing
activities was $4,825,337 for the year ended December 31, 2023 as compared to $17,263,989 for the year ended December 31, 2022. During
the year ended December 31, 2023, we received proceeds from related party borrowings of $850,000, and net proceeds from issuance of convertible
debt and warrants of approximately $2,238,000 (net of original issue discount of $135,000 and cash paid for convertible note issuance
costs of approximately $327,000), and net proceeds from issuance of balloon promissory note of approximately $936,000 (net of cash
paid for promissory note issuance costs of approximately $64,000), and net proceeds from equity offering of approximately $616,000 (net
of cash paid for commission and other offering costs of approximately $19,000), and advance from sale of noncontrolling interest in subsidiary
of approximately $486,000, offset by repayments made for convertible debt of $300,000. During the year ended December 31, 2022,
we received proceeds from related party borrowings of $100,000, and proceeds from issuance of convertible debt and warrants of approximately
$3,719,000, and net proceeds from issuance of balloon promissory note of approximately $4,534,000 (net of cash paid for debt issuance
costs of approximately $266,000), and net proceeds from equity offering of approximately $712,000 (net of cash paid for commission and
other offering costs of approximately $24,000), and proceeds from issuance of Series A Preferred Stock of $9,000,000 to fund our working
capital needs and equity interest purchase, offset by repayments made for note payable – related party of $390,000 and repayments
made for loan payable – related party of $410,000.
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The
following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
● an increase in working capital requirements to finance our current business;
● the cost of being a public company.
August
2019 Credit Facility
In
the third quarter of 2019, we had secured a $20 million credit facility (Line of Credit) provided by our Chairman, Wenzhao Lu. The unsecured
credit facility bears interest at a rate of 5% and provides for maturity on drawn loans 36 months after funding. As of December 31, 2023,
we used approximately $6.8 million of the credit facility and have approximately $13.2 million remaining available under the Line
Credit.
ATM
In
June 2023, we entered into a sales agreement (the “Sales Agreement”) with Roth Capital Partners, LLC
(“Roth”) under which we may offer and sell from time to time shares of our common stock having an aggregate offering
price of up to $3.5 million. From July 1, 2023 to March 29, 2024, Roth has sold an aggregate of 456,627 shares of our common stock
at an average price of $1.39 per share to investors. We received net cash proceeds of $616,259, net of cash paid for sales
agent’s commission and other fees of $19,132.
Balloon Mortgage Note
In May 2023, we, through
Avalon RT 9, executed a balloon mortgage note in favor of a lender (the “Lender”) in the original principal amount of $1,000,000
(the “Balloon Mortgage Note”). The Balloon Mortgage Note accrues interest at the annual rate of 13.0% and is paid in monthly
installments of interest-only in the amount of $10,833 commencing in June 2023 and continuing through October 2025 (at which point any
unpaid balance of principal, interest and other charges become due and payable). The Balloon Mortgage Note is secured by a second-lien
mortgage on our real property in Monmouth County, New Jersey, In addition, we and Avalon RT 9 executed a guaranty related to the Balloon
Mortgage Note.
May 2023 Convertible Note Financing
In
May 2023, we entered into a securities purchase agreement with certain lenders (the “May 2023 Lenders”) and closed on
the issuance of a 13.0% senior secured convertible promissory note in the aggregate principal amount of $1,500,000 (the “May
2023 Note”), as well as the issuance of 75,000 shares of our common stock as a commitment fee and warrants for the purchase of
up to 230,000 shares of our common stock. We and our subsidiaries also entered into a security agreement in connection with the May
2023 Note, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment,
performance and discharge in full of all of our obligations under the May 2023 Note. The May 2023 Lenders acquired the May 2023 Note
for $1,425,000 after an original issue discount of $75,000. The May 2023 Note matures on May 23, 2024 and accrues interest at a rate
of 13.0% per annum. The May 2023 Note contains certain negative covenants. If the May 2023 Note is accelerated following the
occurrence of an event of default as described in such note, we are required to pay 120% of the principal and interest outstanding
under the May 2023 Note. The principal amount and interest under the May 2023 Note is convertible into shares of our common stock at
a conversion price of $4.50 per share, unless we fail to make an amortization payment when due in accordance with the terms of the
May 2023 Note, in which case the conversion price shall be the lower of (i) $4.50 or (ii) 85% of the lowest VWAP of our common stock
on any trading day during the five (5) trading days prior to the respective conversion date, subject to a floor of $1.50 per share.
The warrants are comprised of (i) a warrant to purchase 125,000 shares of our common stock at an exercise price of $4.50 and
exercisable until May 23, 2028 and (ii) a warrant to purchase 105,500 shares of our common stock at an exercise price of $3.20 and
exercisable until May 23, 2028 (which warrant shall be cancelled and extinguished upon the payment of the May 2023 Note). The
conversion price of the May 2023 Note and the exercise price of the warrants issued thereunder contain certain price protection
anti-dilution adjustments if an event of default occurs under the May 2023 Note.
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July 2023 Convertible
Note Financing
In
July 2023, we entered into a securities purchase agreement with certain lenders (the “July 2023 Lenders”) and closed on
the issuance of a 13.0% senior secured convertible promissory note in the aggregate principal amount of $500,000 (the “July
2023 Note”), as well as the issuance of 25,000 shares of our common stock as a commitment fee and warrants for the purchase of
up to 76,830 shares of our common stock. We and our subsidiaries also entered into a security agreement in connection with the July
2023 Note, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment,
performance and discharge in full of all of our obligations under the July 2023 Note. The July 2023 Lenders acquired the July 2023
Note for $475,000 after an original issue discount of $25,000. The July 2023 Note matures on July 6, 2024 and accrues interest at a
rate of 13.0% per annum. The July 2023 Note contains certain negative covenants. If the July 2023 Note is accelerated following the
occurrence of an event of default as described in such note, we are required to pay 120% of the principal and interest outstanding
under the July 2023 Note. The principal amount and interest under the July 2023 Note is convertible into shares of our common stock
at a conversion price of $4.50 per share, unless we fail to make an amortization payment when due which commences in January 2024 in
accordance with the terms of the July 2023 Note, in which case the conversion price shall be the lower of (i) $4.50 or (ii) 85% of
the lowest VWAP of our common stock on any trading day during the five (5) trading days prior to the respective conversion date,
subject to a floor of $1.50 per share. The warrants are comprised of (i) a warrant to purchase 41,665 shares of our common stock at
an exercise price of $4.50 and exercisable until July 6, 2028 and (ii) a warrant to purchase 35,165 shares of our common stock at an
exercise price of $3.20 and exercisable until July 6, 2028 (which warrant shall be cancelled and extinguished upon the payment of
the July 2023 Notes). The conversion price of the July 2023 Note and the exercise price of the warrants issued thereunder contain
certain price protection anti-dilution adjustments if an event of default occurs under the July 2023 Notes.
October 2023 Convertible
Note Financing
In
October 2023, we entered into securities purchase agreements with certain lenders (the “October 2023 Lenders”) and
closed on the issuance of 13.0% senior secured convertible promissory notes in the aggregate principal amount of $700,000 (the
“October 2023 Note”), as well as the issuance of 70,000 shares of our common stock as a commitment fee and warrants for
the purchase of up to 105,000 shares of our common stock. We and our subsidiaries also entered into security agreements in
connection with the October 2023 Note, creating a security interest in certain property of the Company and its subsidiaries to
secure the prompt payment, performance and discharge in full of all of our obligations under the October 2023 Note. The October 2023
Lenders acquired the October 2023 Note for $665,000 after an original issue discount of $35,000. The October 2023 Note matures on
October 9, 2024 and accrues interest at a rate of 13.0% per annum. The October 2023 Note contains certain negative covenants. If the
October 2023 Note is accelerated following the occurrence of an event of default as described in such note, we are required to pay
120% of the principal and interest outstanding under the October 2023 Note. The principal amount and interest under the October 2023
Note is convertible into shares of our common stock at a conversion price of $1.50 per share, unless we fail to make an amortization
payment when due which commences in April 2024 in accordance with the terms of the October 2023 Note, in which case the conversion
price shall be the lower of (i) $1.50 or (ii) 85% of the lowest VWAP of our common stock on any trading day during the five (5)
trading days prior to the respective conversion date. The warrants are comprised of (i) a warrant to purchase 105,000 shares of our
common stock at an exercise price of $2.50 and exercisable until October 9, 2028 and (ii) a warrant to purchase 87,500 shares of our
common stock at an exercise price of $1.80 and exercisable until October 9, 2028 and which warrant shall be cancelled and
extinguished upon the payment of the October 2023 Note. The conversion price of the October 2023 Note and the exercise price of the
warrants issued thereunder contain certain price protection anti-dilution adjustments if an event of default occurs under the
October 2023 Note.
March 2024 Convertible
Note Financing
In March 2024, we entered
into security purchase agreement with a lender (the “March 2024 Lender”) and closed on the issuance of 13.0% senior secured
convertible promissory note in the principal amount of $700,000 (the “March 2024 Note”), as well as the issuance of 105,000
shares of common stock as a commitment fee and warrants for the purchase of up to 252,404 shares of our common stock. We and our subsidiaries
also entered into security agreements in connection with the March 2024 Note, creating a security interest in certain property of the
Company and its subsidiaries to secure the prompt payment, performance and discharge in full of all of our obligations under the March
2024 Note.
56
We estimate that based
on current plans and assumptions, that our available cash will be insufficient to satisfy our cash requirements under our present operating
expectations through cash flow provided by operations, and cash available under our ATM and lending facilities and sales of equity. Other
than funds received as described above and cash resource generating from our operations, we presently have no other significant alternative
source of working capital. We have used these funds to fund our operating expenses, pay our obligations and grow our company. We will
need to raise significant additional capital to fund our operations and to provide working capital for our ongoing operations and obligations.
Therefore, our future operation is dependent on our ability to secure additional financing. Financing transactions may include the issuance
of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock
and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or
debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or
experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity
or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges
senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and
may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will be required
to cease our operations. To date, we have not considered this alternative, nor do we view it as a likely occurrence.
Off-balance Sheet
Arrangements
We presently do not have
off-balance sheet arrangements.
Foreign Currency Exchange Rate Risk
In November of 2022,
we decided to cease all operations in China with the exception of a small administrative office, Avalon Shanghai. We do not expect nor
do we plan that there will be further revenue generated from PRC operations in the foreseeable future. Thus, exchange rate fluctuations
between the RMB and the US dollar do not have a material effect on us. For the years ended December 31, 2023 and 2022, we had an unrealized
foreign currency translation loss of approximately $19,000 and $48,000, respectively, because of changes in the exchange rate.
Inflation
The effect of inflation
on our revenue and operating results was not significant.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller
reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements begin
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls
and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the
Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and to ensure
that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure. We carried out an
evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal
financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e)
under the Exchange Act, as of the end of the period covered by this report. Our management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. During evaluation of disclosure
controls and procedures as of December 31, 2023, conducted as part of our annual audit and preparation of our annual financial statements,
our management, including our CEO and CFO, conducted an evaluation of the effectiveness of the design and operations of our disclosure
controls and procedures and concluded that our disclosure controls and procedures were not effective due to the reasons set forth below.
57
Management’s Report on Internal Control
over Financial Reporting
Management is responsible
for the preparation and fair presentation of the financial statements included in this report. The financial statements have been prepared
in conformity with accounting principles generally accepted in the United States of America and reflect management’s judgment and
estimates concerning effects of events and transactions that are accounted for or disclosed.
Management is also responsible
for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting includes
those policies and procedures that pertain to our ability to record, process, summarize and report reliable data. Management recognizes
that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of
human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting
can provide only reasonable assurance with respect to financial statement presentation. Further, because of changes in conditions, the
effectiveness of internal control over financial reporting may vary over time.
Management regularly assesses our internal
control over financial reporting and did so most recently for our financial reporting as of December 31, 2023. This assessment was
based on criteria for effective internal control over financial reporting described in the Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management has
concluded that our internal control over financial reporting was not effective as of December 31, 2023, due to the lack of
segregation of duties resulting from our small size and inability to perform an effective test of the operating effectiveness of the
controls, including the oversight of our financial statement close process. As a result of our Lab Services MSO transaction in
February 2023, we retained additional accounting staff and hired a Controller that works part-time for Lab Services MSO and
part-time for the Company. We hope to be able to utilize the Controller going forward to enhance the segregation of duties. In
addition, the Company has transitioned all email servers to the United States to enhance this aspect of internal controls.
In light of the material weaknesses
described above, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the
year ended December 31, 2023 included in this Annual Report on Form 10-K were fairly stated in accordance with US GAAP. Accordingly, management
believes that despite the material weakness identified in our internal control over financial reporting, our consolidated financial statements
for the year ended December 31, 2023 are fairly stated, in all material respects, in accordance with US GAAP.
Changes in Internal Control over Financial
Reporting
Other than those described above, there were no changes in our internal
control over financial reporting, as such term is defined in Rules 13a-15(f) under the Exchange Act, during the quarter ended December
31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form
10-K does not include an attestation report by our independent registered public accounting firm, regarding internal control over financial
reporting. As a smaller reporting company, our internal control over financial reporting was not subject to audit by our independent registered
public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report.
ITEM 9B. OTHER INFORMATION
(a) We issued 105,000 shares of our common stock as a commitment fee
and warrants for the purchase of up to 252,404 shares of our common stock in connection with the issuance of the March 2024 Note to the
March 2024 Lender.
(b) During the quarter ended December 31, 2023,
none of our directors or executive officers adopted or terminated a Rule 10b5-1 trading plan or a non-Rule 10b5-1
trading arrangement (as defined in Item 408(c) of Regulation S-K).
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS
THAT PREVENT INSPECTIONS.
Not applicable.
58
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Below are the names of and
certain information regarding our executive officers and directors as of the date hereof:
Name Age Position
Wenzhao Lu 66 Chairman of the Board of Directors
David Jin, MD, PhD 56 Chief Executive Officer, President and Director
Meng Li 46 Chief Operating Officer and Secretary
Luisa Ingargiola 56 Chief Financial Officer
Steven A. Sanders 78 Director
Lourdes Felix 56 Director
Wilbert J. Tauzin II 80 Director
William B. Stilley, III 56 Director
Tevi Troy 56 Director
Officers are elected annually
by the Board (subject to the terms of any employment agreement), at our annual meeting, to hold such office until an officer’s successor
has been duly appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board.
The principal occupation and
business experience during at least the past five years for our executive officers and directors is as follows:
Wenzhao Lu, Chairman of the Board of Directors
Mr.
Wenzhao Lu has served as our Chairman of the Board since October 10, 2016. He is a seasoned healthcare entrepreneur with extensive operational
knowledge and experience in the US & Asia. He has served as Chairman of the board of directors of the Daopei Medical Group, or DPMG,
since 2010 to December, 2021. Under his leadership, DPMG operates three top-ranked private hospitals (located in Beijing and Hebei), specialty
hematology laboratories, and a hematology research institute, with more than 100 partnering and collaborating hospitals in China. DPMG
was founded by Professor Daopei Lu, a renowned hematologist pioneering in hematopoietic stem cell transplant and a member of the Academy
of Engineering in China. Mr. Lu received a Bachelor of Arts from Temple University Tyler School of Arts in 1988 and subsequently worked
as senior Art Director at Ogilvy & Mather Advertising Company. Prior to joining DPMG, in 2009, Mr. Lu served as Chief Operating Officer
of BioTime Asia Limited, a subsidiary of BioTime, Inc. (NYSE American: BTX). Mr. Lu is qualified to serve as a director because of his
extensive operational knowledge of, and executive level management experience in, the healthcare industry.
David Jin, Chief Executive Officer, President
and Director
Dr.
David Jin, MD, PhD, has served as our Chief Executive Officer, President and as a member of our Board since September 14, 2016. From 2009
to 2017, Dr. Jin served as the Chief Medical Officer of BioTime, Inc. (NYSE American: BTX), a clinical stage regenerative medicine company
with a focus on pluripotent stem cell technology. Dr. Jin also acts as a senior translational clinician-scientist at the Howard Hughes
Medical Institute and the Ansary Stem Cell Center at Weill Cornell Medical College of Cornell University. Prior to his current endeavors,
Dr. Jin was Chief Consultant/Advisor for various biotech/pharmaceutical companies regarding hematology, oncology, immunotherapy and stem
cell-based technology development. Dr. Jin has been Principle Investigator in more than 15 pre-clinical and clinical trials, as well as
an author/co-author of over 80 peer-reviewed scientific abstracts, articles, reviews, and book chapters. Dr. Jin studied medicine at SUNY
Downstate College of Medicine in Brooklyn, New York. He received his clinical training and subsequent faculty tenure at the New York-Presbyterian
Hospital (the teaching hospital for both Cornell and Columbia Universities) in the areas of internal medicine, hematology, and clinical
oncology. Dr. Jin was honored as Top Chief Medical Officer by ExecRank in 2012, as well as recognized by Leading Physicians of the World
in 2015. Dr. Jin is qualified to serve as a director because of his role with us, and his extensive operational knowledge of, and executive
level management experience in, the healthcare industry.
59
Meng Li, Chief Operating Officer and Secretary
Ms.
Meng Li has served as our Chief Operating Officer, Secretary since October 10, 2016 and served as a member of the Board from October 10,
2016 to July 9, 2018 and from April 5, 2019 through December 30, 2022. Ms. Li has over 15 years of executive experience in international
marketing, branding, communications, and media investment consultancy. Ms. Li served as Managing Director at Maxus/GroupM (a WPP Group
company) where she was responsible for business P&L and corporate management from 2006 to 2015. Prior to joining Maxus/Group M, Ms.
Li worked for Zenith Media (a Publicis Group company) from 2000 to 2006 as Senior Manager. Ms. Li received a Bachelor of Arts in International
Economic Law from Dalian Maritime University in China.
Luisa Ingargiola, Chief Financial Officer
Luisa
Ingargiola has served as our Chief Financial Officer since February 21, 2017. Ms. Ingargiola has significant experience serving as Chief
Financial Officer or Audit Chair for multiple Nasdaq and New York Stock Exchange companies. She currently serves as Director and Audit
Chair for several public companies including ElectraMeccanica (NASDAQ:SOLO), Dragonfly Energy (DFLI) and Vision Marine (VMAR). From 2007
through 2016, Ms. Ingargiola served as the Chief Financial Officer and then a member of the board of directors at MagneGas Corporation
(Nasdaq: MNGA). Prior to 2007, Ms. Ingargiola held various roles as Budget Director and Investment Analyst in several private companies.
Ms. Ingargiola graduated in 1989 from Boston University with a Bachelor’s degree in Business Administration and a concentration
in Finance. In 1996, she received her MBA in Health Administration from the University of South Florida. Ms. Ingargiola is qualified to
serve as a Chief Financial Officer because of her extensive knowledge corporate governance, regulatory requirements, executive leadership
and knowledge of, and experience in, financing and M&A transactions.
Steven A. Sanders, Director
Steven
A. Sanders has served as a member of the Board since July 30, 2018. Since January 2017, Mr. Sanders has been Of Counsel to the law firm
of Ortoli Rosenstadt LLP. From July 2007 until January 2017, Mr. Sanders was a Senior Partner at Ortoli Rosenstadt LLP. From January 1,